Friday December 9, 2005 - 12:14:48 GMT
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Black Swan Capital - www.blackswantrading.com
Inflation or financial speculation?
“Tis better to have loved and lost than never to have lost at all.”
One consistently wonders why economics garners so much respect from the studious and precise mathematics crowd when we have trouble answering a simple question: Is what we are seeing global inflation or simply highly levered financial speculation?
There is a broad group that says don’t worry about inflation as long as the core rate is tame. Don’t worry about the other stuff. Don’t worry that metals—and now natural gas are trading off the charts. Don’t worry that health care and related sundries continue to cost more.
The other side says we should be very worried. Gold is pointing to massive global inflation ahead. Oil will rise again and along with gas and heating oil energy prices will seep into the core rate and wages are going up too.
There is little middle ground among true believers—there rarely is.
We have a foot in both camps, at times. But push come to shove, we still believe the secular forces of deflation win the day: global trade, freeing of billions into the work force and technology we think will continue to undermine price traction.
Going a bit deeper, we think liquidity (and of course we realize liquidity is the raw material of inflation, but we narrowly define our use of liquidity as of the financial speculation variety) has played a much greater role in driving metals and energy speculation than its given credit for. Bonds, crude, and metals have been trending higher together since 2000 as you can see in the chart below:
If crude and metals prices are “so” inflationary, wouldn’t we have seen some decent divergence (from bonds) by now?
Is now the elusive “tipping” point?
Could it be that prices of metals and energy are supply/demand driven (two curves that we can hardly identify even though we assume we know their shape) and not necessarily inflationary?
Could it be the rally in gold—a commodity of the non-industrial variety—is telling us more people/institutions simple are preferring more gold to paper money—all paper money?
Is the demand for gold at all times inflationary—as it suggests an underlying decline in the purchasing power of fiat currency?
What happens if, or when, those elusive petro-dollars dry up AND the housing market slips at the same time—will we then learn whether this environment is more liquidity driven speculation or real inflation?
Much of this argument depends on whether China is growing or not. And as we reported earlier this week—Morgan Stanley sees a slowdown on excess capacity and financial speculation, while ANZ Bank sees a shift to the interior and strong growth ahead.
Is your brain in spin mode yet—ours is? (But then again our brain is more likely to spin out of control than the average. After all, to focus on currency markets by definition one has to have a few loose screws.)
Are we at a critical junction in many asset markets at a time when the Fed ponders “new language” and brings on a new man to take the helm?
We have answers to most of the questions we posed this morning—but we question whether or not our answers are right. What deep down concerns us about the current environment flows from something George Soros wrote back in 1987 (before October of that year):
“Financial assets continue to accumulate at a pace which outstrips the creation of ‘real wealth’, and this disparity is one of those excesses that needs to be corrected.”
Black Swan Capital
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